As part of the 'Jackson reforms' which came into effect on 1 April 2013, new rules on cost management in civil litigation (including commercial litigation and personal injury) are now in force. Courts are now required to deal with cases justly and 'at a proportionate cost'. Litigants have a duty to the courts to assist them in achieving this, and in order to comply with the new test of proportionality, they will be required to provide costs budgets, setting out the costs that they expect to incur at each stage of the litigation. These reforms are designed to assist parties in managing and reducing their costs liability throughout the litigation process, by making each party's potential liability for the other's litigation costs more predictable from the outset.

When do the new reforms  apply?

The reforms apply to all cases on the multi-track with the exception of Commercial Court and Admiralty Court cases. As from 18 February 2013, costs budgeting will not apply to any cases where at the date of the first case management conference, the sums in dispute exceed £2 million (excluding interests and costs unless the court orders otherwise) if the case is in the Chancery Division, the Technology and Construction Court and the London Mercantile Court. It is worth noting however that the judges can always exercise their discretion and opt to apply the cost budgeting rules to any cases.

New test of proportionality

The new test replaces the previous test applied on detailed assessment of costs prior to April 2013, in which the courts would allow costs which were reasonably and necessarily incurred, even if they were disproportionate to the value of the claim.

Under the new rules, costs which are disproportionate may be disallowed or reduced, even if they are reasonably or necessarily incurred. Any doubt as to whether costs were proportionately incurred will be resolved in favour of the paying party. In practice, this means that significantly more costs than previously are likely to be disallowed.  The new test applies to work commenced on or after 1 April 2013.

In determining whether costs are proportionate, the courts will have regard to the following factors: (i) the sums in issue, (ii) the value of any non-monetary relief, (iii) the complexity of the litigation, (iv) any additional work generated by the conduct of the paying party, and (v) any wider factors, such as reputation or public importance.

What is the procedure?

All parties (except those who are litigants in person, or unless the court orders otherwise) are required to produce budgets (in a specified form, known as Precedent H) for each stage of the litigation process, from pre-action all the way to trial, and file these with the court. Parties are encouraged to discuss their costs budgets and seek to agree them (or at least part of them) prior to filing and exchanging in order to avoid a court imposed budget. If the parties agree the budgets, the court has no power to intervene but can only approve or refuse to approve the budgets (in the latter case, it will make a comment in the form of a recital on the order). However if the budgets are not agreed, the court will make revisions to the budgets prior to approving them.  

The court may then make a costs management order to record the agreement between the parties or in the event of non-agreement, the approved budget, and will make directions for future reviews of budgets as necessary. If a cost management order is not made, the court will restrict recoverable costs if there is more than a 20% difference between the last approved budget and the actual costs claimed.

Failure by a party to file and exchange a budget will mean that only court fees will be recoverable. This is a draconian sanction, and emphasises the importance that parties must place on preparing costs budgets.  The costs of preparing the initial budget must not exceed £1,000 or one percent of the approved budget (whichever is the higher) and all other costs associated with the budgeting process must not exceed two percent of the approved budget.

When assessing costs, the court is not allowed to depart from the cost budgets without 'good reason'. It is not yet known what will constitute a 'good reason' and this will become clearer as case law applying the new rules emerges, but it is expected that this will mean that the budget approved by the court will essentially be a cap on the amount that can be recovered from the other side at the end of the litigation.

Parties may need to revise their budget upwards or downwards as the litigation progresses, but they will only be allowed to do so 'if significant developments in the litigation warrant such revision' and again it is not yet clear what evidence will be necessary to prove a 'significant development'. Given these uncertainties, parties are advised to regularly check their budgets for each stage of the litigation to ensure that they do not become disproportionate and spiral out of control, as well as making sure that the budgets make realistic and sufficient provisions for costs in the first place.

Practical considerations

Under these new rules, it is essential that costs throughout the duration of a dispute are constantly monitored, and that future forecasts are regularly reviewed. Recent case law has shown that even if a court finds the costs incurred by one party to be reasonable and necessary as a result of the other party's conduct in the proceedings, it will limit the recoverability of costs should a party not follow the new regime precisely and notify the court and the other side that it expects to depart from its approved budget.

Should a court decide that costs have become disproportionate, it is important that parties are properly advised as to the risks involved in pursuing litigation further where the costs will not be recoverable from the other side. If, for example, a party has not been granted the full amount of costs sought in a costs management order, then they will need to decide whether the amount of work should be limited to fit in with the approved cost budget (which may mean that the case cannot be fought as effectively as it might otherwise have been) or whether they personally should finance the costs which will not be recoverable, even if they win.  The cost of doing so could make the litigation no longer worthwhile. 

As time goes by and the new rules are put into practice more and more, we will have an increased body of guidance on how the rules will work in practice.  In the meantime however, we are in a transitional period of uncertainty for all involved.